Once again, WN (Southwest) stands out from the pack. Each flight credit either becomes an award or dies within 12 months. Each award is either used or dies within 12 months of issuance (OK, you can pay $50 for an extension, but hardly anybody does). With this setup, investors don't need to worry that liabilities will accumulate. It's simple and honest, like most other policies at Southwest.

A couple of followups to LemonThrower and gleff (whose blog I read daily):

- DL can value those award flights at $22.80 each because they probably believe that a small fraction of them will ever be redeemed, like my Tino currency example above.

- I love what Randy has done to glamorize FF programs, much to our benefit (more discussions and scutiny of the programs). However, his cheerleading clearly goes over the line on occasions. Telling flyers to rack up as many airline miles as they can on United, an airline that hasn't paid its bills for over a year, is irresponsible. When a large airline (er, an AMERICAN airline)inevitably shuts down its FF program, we're going to hear a lot of excuses about "a perfect storm", "victims of circumstance", blah blah blah...

DL can value award flights at $22.80 because that is their marginal cost. As an investory, I would be in favor of this treatment because I don't want FF liabilities to obscure cash liabilities.
Irresponsible is too strong a word to use. Even if you disagree with the assessment that United will pull through, there is historical precedent for a FF program to be acquired as a part of bankruptcy. Is it a sure thing? No. Does it unreasonable? I don't think so.
I don't think we would hear excuses from Randy. I think we'd hear: "Well, I didn't think we'd see this, but I guess I was on the wrong side of the trade."

[This message has been edited by lensman (edited 10-14-2003).]

I don't have a problem with DL calculating that their marginal cost is $22.80. I have a problem wiht the lack of transparency regarding their assumptions regarding the number of miles/awards that will be redeemed, and more importantly the factors that affect one's ability to redeem awards. How did they get to 10 million redemptions? How many miles are they assuming will never be redeemed? I'm sure if you took the number of outstanding miles and divided by 25,000, you would get more than 10 million - they are assuming many of those miles will never be redeemed. How many awards do they make available on each flight? They don't want to answer this question, and that is what is shady.

As for Randy, I honestly don't know. Someone cited Randy as if he is the be all end all on this issue. To paraphrase - Randy says this won't be a problem, so it wont' be a problem. He probably is the definitive authority on some issues, but I don't think he has a crystal ball on this one, and his business with the majors may affect his objectivity. Just saying his view is not the end of the discussion.

I would draw the following conclusions from recent program changes:

(1) The base award of 25K is here to stay for a while, as many non-airline programs (e.g. Capital One) use a similar standard.
Further, most people will have little difficulty redeeming these awards due to the overlapping route structure in the lower 48 US states.

(2) You will see rapid and massive inflation for extremely popular awards such as Hawaii (coach and first) and US-Europe (peak season and first) awards.

(3) Certain awards (e.g. Hawaii and Overseas first class) will become difficult to impossible for non-elites to obtain.

What I find curious is that it is next to impossible to redeem miles for upgrades on discounted fare classes (e.g. insULT fares). This policy creates a situation where the customer is forced to redeem more miles for a business or first ticket that is completely gratis vs. a paid, albeit discounted ticket.

It does make sense if you consider the following:

Assume any coach fare, C, is upgradeable with miles.

Take the limit as C -> 0. Now you're handing out First Class award seats for only 10,000 miles rather than the 40,000 it should take.

Solution: prohibit upgrades on coach fares below a certain threshold.

------------------
"Yippie-kay-yay, Mr. Falcon!" -- John McClane, Die Hard II As Seen on TV

The Economist has another article that I prefer to the one we have linked earlier in this thread. I have premium ed, so I'll just cut and paste it below:

But first, I'd just like to comment that what I find so fascinating about this is the sheer size of milage - said to be the second largest global currency after the dollar. The problem is that miles are not liquid - you cannot use Skymiles on United. Personally, I think there should be a central mechanism, sort of like a stock exchange, for moving loyalty points around. It should be endorsed by the airlines. I see Points.com as being this, which is why I have invested in the company. Granted, their exchange ratios are not good, but I believe this idea is one that will become more and more inevitable. After all, only 100mm people have miles - this should double in the next five years.


Here is the article:

THE world has a new international currency: frequent-flyer miles. Launched exactly 21 years ago, they are a lot like money. Collectors check their mileage statements as keenly as their bank statements. American courts often place a value on mileage balances in the course of divorce settlements. In a recent poll of frequent travellers, two-thirds said that they see frequent-flyer miles as the next best thing to actual cash: almost half even thought they should earn interest on their accounts. Will they still be as keen a year from now? Maybe not. This peculiar new currency has not been well-managed. Devaluation is on the cards.

Frequent-flyer miles started as a marketing gimmick, but they have become a lucrative business. Airlines sell miles to partners, such as credit-card companies and car-rental agencies. Roughly half of all miles are now earned on the ground, not in the air. This makes them ever easier to acquire. At the end of April, the worldwide stock of unredeemed miles was probably close to 8.5 trillion (see article). Miles can be worth anywhere between two and nine cents apiece when they are used to buy an air ticket. Valued at the mid-point of this range, the total global stock of frequent-flyer miles may now be worth almost $500 billion.

Comparing this with all the notes and coins in circulation around the globe, frequent-flyer miles could be said to be the world's second-biggest currency after the dollar. Indeed, at its present pace of growth the stock of miles is likely to overtake the physical stock of dollars within two years. Of course this ignores the much bigger stock of dollars sitting in bank accounts. But frequent-flyers care more about liquidity�preferably a glass of champagne after take-off�than about the precise differences between M0, M1 and M3.

Miles outstanding have risen by an average of 20% a year since 1995�two-and-a-half times as fast as the supply of dollars. Central bankers would suffer sleepless nights at such reckless monetary expansion were it not for the fact that they are usually up in first class collecting double or triple miles. The plain truth is that airlines have been printing too much of their currency. They are issuing more miles than they can ever supply in free seats. (Only a small fraction of miles are used to buy other goods and services.) As any first-year economics student knows, excessive monetary growth can lead to hyperinflation and devaluation.

The airlines will be all right. The small print allows them to restrict seat availability and to change the rules of their schemes at will. Inflation hurts the mugs left holding the currency. Either airlines will increase the number of miles required for a free flight (not for the first time), or travellers will find that booking the flight of their choice becomes even harder than it is already. Both are a form of devaluation. Spend them while you can.

Southwest is NOT issuing more than it can redeem in free seats. For one thing, their awards have no capacity controls. For another, you don't have a choice to sit on your credits; you are forced to burn them within 12 months. Southwest is not letting itself or its customers play with the fire of devaluation by maintaining huge unredeemed balances. This, to me, shows intelligence and integrity behind the program.

Just for grins, here's an idea: suppose the airlines were to remove capacity controls on FF awards for their highest elite level(s) (like Hilton)? Or open up more seats up to a certain percentage for intermediate elite levels? Would that create more loyalty, or just hose the non-elites?

Beck,

I believe that until the end of the month you can still use your Skymiles on UA, so that is not such a good example.

As far as points.com goes, they are pretty poor and at the end of the day, if they are successful, there will be no minority shareholder vote left (this is the way Mr. Diller normally operates) so I wouldn't think it such a great investment.

Though I think it was underreported by industry watchdogs, Continental did just that several years ago-Only highest elites can book overseas Business Class more than 30 days in advance and I would guess they get prefered treatment elsewhere too, though I can't recall the details.

I think it has had both effects-high level elites must be more loyal since they're getting a better deal. As a a non-elite, it caused me to leave CO.

While I remain disappointed in CO's program, from a business standpoint I think it may have been a good move. The high level elites are in large measure the ones who pay those high last minute fares, and getting those customers has been central to the models of all but the bargian airlines. This is even more true after 9/11 as there are fewer whales to go around. Losing grunts like me is unfortunate maybe but likely no big deal in the bigger picture.



[This message has been edited by Mountain Trader (edited 10-17-2003).]

Mr Diller's investment in Points.com is indeed interesting. IACI controls well over 60% of the tickets sold online (not through a carrier) through ownership of expedia, hotels.com, and now hotwire. Personally, I see Diller as trying to set up a loyalty program with his properties through his investment in points.com. And while Diller does usually wrestle a majority control, he always eventually fully acquires the company, which has so far been very good for shareholders of expedia, hotels, lendingtree, ect.

Tino - cheerleading huh? Disappointed that I haven't earned any respect from you. FYI, i really am not in the cheerleading mode. Just wondering what in my past makes you think i'd offer up excuses such as the ones you note by putting these types of words in my mouth? For what I do, I put in an enormous amount of research, backed by doing this stuff full-time since Feb. 1986. Can you name anyone else that has been able to stay respectable for that length of time? And when I say respectable, I'm referring to the advice that one may give out and be correct in that advice. Let's take the last year. I think that I've only made advice and comment on three major issues: the life or death of US Airways Dividend Miles, the life or death of United Mileage Plus and months ago when Continental followed the lead of Delta for elite re-qualification.

For US Airways. I was the only (repeat, only) travel related writer/analyst that told members of Dividend Miles that I did not see any danger to the miles in their program for the year in the future. That the program I felt would survive with the airline and that perhaps the program would become even more valuable. This one was pretty risky I admit. But I meant what I said and I am very proud that I was the only one to call this one correct.

For United. similar to US Airways. Every other writer/analyst told members to burn their miles. I did not, even though close friends and an employee thougt i was going to be wrong on this one. And as you said, I even told members to earn even more miles than ever since at the time (late last year) United/Bank One was running a promotion earning double miles om all credit card transactions. Again, I was the only one correct in this call.

Point: in these two calls, I was a little nervous because I knew that if I was wrong, I've never work in this town again. I was, in reality, putting my rep on the line. US Airways was a very risky call, United was a monsterous call. If I had been wrong, who in the hell would have ever believed me again? Every single other writer/analyst told members to bail because that was the easy advice. Cheerleading? Cheerleaders are yesterday's news if they are wrong.

Continental/Delta elite requalification. If you'll recall when Continental out of the blue announced that they were following the lead of Delta and would restrict EQM's on less expensive flights purchased. Everyone went off the deep end and predicted that all the others would follow and be proof of further devaluation fo these programs. I beleive that I stated I did not see even Northwest following their partners on this issue and that I did not feel any of the other major programs would follow. Looking back, northwest did not follow partners DL/CO and the other programs, AA, UA, US did not follow DL/CO and in fact even made things better for their members. I beleive I was correct in my call.

For the record, I did not see DL coming out with their new enhanced upgrade privileges.

Now Tino. What is it you don't like about my advice vs. those of anyone else? I sincerely hope I am not wrong in future situations like these which could cause major problems for members. Because I count this as paramount in what I do, I will continue to do as much research as humanly possible to make sure my advice is something my readers can count on. so far, I have enjoyed a pretty damm good record which is perhaps why I've been able to have a loyal following for 18 years.

As for being a cheerleader? Call it what you may, I'm actually proud to be a stout proponent of the use of frequent flyer programs to enhance the value of travel choices. And I'd say that anyone still collecting miles joins me in that regard. If not, then cash in your miles and go home.

Wonderfully informative thread seeing our beloved FF Mile business from a macroeconomic perspective. Good observations made by Gleff!!!

Here is the article

"Miles outstanding have risen by an average of 20% a year since 1995�two-and-a-half times as fast as the supply of dollars. Central bankers would suffer sleepless nights at such reckless monetary expansion were it not for the fact that they are usually up in first class collecting double or triple miles. The plain truth is that airlines have been printing too much of their currency. They are issuing more miles than they can ever supply in free seats. (Only a small fraction of miles are used to buy other goods and services.) As any first-year economics student knows, excessive monetary growth can lead to hyperinflation and devaluation.

The airlines will be all right. The small print allows them to restrict seat availability and to change the rules of their schemes at will. Inflation hurts the mugs left holding the currency. Either airlines will increase the number of miles required for a free flight (not for the first time), or travellers will find that booking the flight of their choice becomes even harder than it is already. Both are a form of devaluation. Spend them while you can."


Very interesting.

Here is another Economist article

"The fine print of frequent-flyer programmes makes chilling reading. The rules for AAdvantage warn that �the accumulation of mileage credits does not entitle members to any vested rights...In accumulating mileage, members may not rely on the continued availability of any award.� The clear lesson is: use your miles while you can."